Leading Economic Indicator Nebraska

Transcription

1 Nebraska Monthly Economic Indicators: September 16, 2016 Prepared by the UNL College of Business Administration, Department of Economics Authors: Dr. Eric Thompson, Dr. William Walstad Leading Economic Indicator...1 Coincident Economic Indicator. 3 Weights and Component Shares. 5 Performance of the LEI-N and CEI-N. 6 Summary: The Leading Economic Indicator Nebraska (LEI-N) fell by 0.32% during August of The decline in the LEI-N, which predicts economic growth in the state six months in the future, followed an increase of similar magnitude during July. Taken together, the two months of results suggest slow economic growth in Nebraska in early Three of the six components of the LEI-N were negative during August. There was an increase in initial claims for unemployment insurance, as well as a decline in manufacturing hours during the month. There also was a small decline in airline passenger counts. At the same time, three components of the LEI-N were positive during August. Business expectations were positive, as respondents to the August Survey of Nebraska Business reported plans to increase sales and employment over the next 6 months. There also was an increase in building permits for single-family homes. Finally, the value of the the U.S. dollar dropped during August, which is positive for Nebraska businesses which export. Leading Economic Indicator Nebraska Figure 1 shows the change in the Leading Economic Indicator Nebraska (LEI-N) in compared to the previous month. The LEI-N predicts economic growth six months into the future. The LEI-N fell by 0.32% during August. 2.50% 1.25% Figure 1: Change in LEI-N Rapid Growth Moderate Growth -1.25% -2.50% Moderate Decline Rapid Decline -0.32% Figure 2 shows the change in the LEI-N over the last six months. The figure shows a mixed result for the LEI-N during July and August, with increase in July is reversed by the drop in August. These results suggest that growth in the Nebraska economy will be slow in early Prior to July, the LEI-N rose sharply during three of the four months, suggesting strong growth in Nebraska for the rest of this year. 1

2 Building Permits Airline Passengers Dollar Exchange Rate Initial UI Claims Manufacturing Hours Business Expectations Trend Adjustment 2.48% 1.24% Figure 2: Change in LEI - N Last 6 Months 2.22% 1.34% 1.90% 0.35% -1.24% -0.64% -0.32% -2.48% Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Figure 3 shows the components of change in the Leading Economic Indicator Nebraska during August The change in the overall LEI N is the weighted average of changes in each component (see page 5). Looking at individual components, there was an increase in initial claims for unemployment insurance during the month. This increase suggests some weakening of what has been a robust Nebraska labor market. In addition, there was a drop in manufacturing hours during August and a modest decline in airline passenger counts. By contrast, business expectations were a positive component of the LEI-N. Respondents to the August Survey of Nebraska Business predicted growth in both sales and employment at their businesses over the next six months. There also was an increase in building permits for singlefamily homes. Finally, there was a drop in the value of the U.S. dollar during August. This is a positive for Nebraska exporters, including in agriculture and manufacturing. Note that the trend adjustment component pictured in Figure 3 is discussed on page % Figure 3: LEI-N Components of Change 1.24% -1.24% -2.48% 0.20% -0.04% 0.24% -0.80% -0.16% 0.13% 0.10% 2

3 Coincident Economic Indicator Nebraska The Coincident Economic Indicator - Nebraska (CEI-N) is a measure of the current size of the Nebraska economy. The CEI-N also fell by 0.32% during, as seen in Figure % 1.28% Figure 4: Change in CEI-N Rapid Growth Moderate Growth -1.28% -2.56% Moderate Decline Rapid Decline -0.32% As seen in Figure 5, the CEI-N has been mixed over the last six months. Declines during July and August reverse a solid increase during June. Results also are mixed for the March to May period. It will be critical to monitor whether the CEI-N expands during the last four months of the year, as would be expected given large increases in the LEI-N during the months of March through June. Figure 5: Change in CEI-N Last 6 Months 2.56% 1.28% 1.29% 0.83% -1.28% -0.66% -0.40% -0.31% -0.32% -2.56% Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 As seen in Figure 6, three components of the CEI-N fell during August. There was a decline in private wages, reflecting a drop in real hourly wages and weekly hours. There also was a decline in business conditions, as respondents of the August Survey of Nebraska Business reported a drop in sales in recent months. Finally, agricultural commodity prices continued to decline in August. Electricity sales was the only improving component of the CEI-N. Electricity sales rose after adjusting for weather and other 3

4 Electricity Sales Private Wages Agricultural Commodities Business Conditions seasonal factors. A detailed discussion of the components of the CEI-N and LEI-N can be found at in Technical Report: Coincident and Leading Economic Indicators- Nebraska. 2.56% Figure 6: CEI-N Components of Change 1.28% -1.28% -2.56% 0.69% -0.14% -0.36% -0.52% Figure 7 shows the forecast for the CEI-N over the next six months. The forecast calls for strong economic growth in Nebraska during the rest of 2016 but slow growth during the first two months of This outlook is consistent with recent values for the LEI-N, which rose sharply from March through June but were mixed during July and August (see Figure 2). 1.30% 0.80% 0.30% -0.20% -0.70% -1.20% -1.70% Figure 7: 6-Month Forecast of Coincident Economic Indicator - Nebraska 1.23% 0.35% 0.58% 0.58% -0.03% 0.14% Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb Index Growth Index Value 4

5 Weights and Component Shares Table 1 shows the weights used to aggregate the individual components into the LEI-N and CEI-N. The weights are the inverse of the standardized standard deviation of each component variable. The term standardized simply means that the inverse standard deviations are adjusted proportionately to sum to 1. This weighting scheme makes sense since individual components that are more stable have smaller standard deviations, and therefore, a larger inverse standard deviation. A large movement in a typically stable economic series would provide a more powerful signal of economic change than a large movement in a series that regularly has large movements. Leading Economic Indicator - Nebraska Table 1: Component Weights for LEI-N and CEI-N Weight (Inverse STD Standardize) Coincident Economic Indicator - Nebraska Weight (Inverse STD Standardize) Variable Standard Deviation Inverse STD Variable Standard Deviation Inverse STD SF Housing Permits Electricity Sales Airline Passengers Private Wages Exchange Rate Agricultural Commodities Initial UI Claims Survey Business Conditions Manufacturing Hours Survey Business Expectations Tables 2 and 3 show the calculation for the change in CEI-N and LEI-N between July and August of Weights (from Table 1) are multiplied by the change to calculate the contribution of each component. Contributions are converted to percentage terms and summed. Note that in Table 2 a trend adjustment factor is utilized in calculating LEI-N. This is done because LEI-N historically under-predicts CEI-N by 0.10% per month. The U.S. Leading Economic Indicator also has a trend adjustment. Table 2: Component Contributions to the Change in Leading Economic Indicator Leading Economic Indicator - Nebraska Component Index Value (May 2007=100) Component Current Previous Difference Weight Contribution Percentage Contribution (Relative to Previous LEI-N) SF Building Permits % Airline Passengers % U.S. Dollar Exchange Rate (Inverse) % Initial Unemployment Insurance Claims (Inverse) % Manufacturing Hours % Survey Business Expectations % Trend Adjustment % Total (weighted average) % 1 Survey results are a diffusion Index, which is always compared to 50 Table 3: Component Contributions to the Change in Coincident Economic Indicator Coincident Economic Indicator - Nebraska Component Index Value (May 2007=100) Component Current Previous Difference Weight Contribution Percentage Contribution (Relative to Previous CEI-N) Electricity Sales % Private Wage % Agricultural Commodities % Survey Business Conditions % Total (weighted average) % 1 Survey results are a diffusion Index, which is always compared to 50 5

6 CEI-N (May 2007=100) CEI-N (May 2007=100) LEI-N, 6 Month Forward (May 2007=100) Real GDP (May 2007=100), SA Performance of the LEI-N and CEI-N Further information is available on both economic indicators to demonstrate how well the CEI-N tracks the Nebraska economy and how well the LEI-N leads the CEI-N. Figure 8 shows the value of CEI-N and the real gross state product (real GDP) in Nebraska for 2001 through The comparison ends in 2012 since this is the last year for which data on real gross state product is available. Annual real gross state product data is provided by the Bureau of Economic Analysis, U.S. Department of Commerce, and quarterly values were estimated using quarterly earnings data. CEI-N closely tracks Nebraska real GDP for the period. The correlation coefficient between the two pictured series is Figure 8: Coincident Economic Indicator - Nebraska Comparison with Nebraska Real Quarterly GDP Figure 9 again shows the values for the CEI-N. It also graphs 6-months forward values for the LEI-N. Recall that the LEI-N is intended to forecast the Nebraska economy six months into the future. This implies that Figure 9 is comparing the predicted movement in CEI-N (predicted by LEI-N values six months earlier) with the actual movement in CEI-N. In Figure 9, predicted values using the LEI-N closely track trends and movement in the CEI-N. The correlation coefficient between CEI-N and six-month forward values of LEI-N is Figure 9: 6-Month Forward Value of Leading Economic Indicator - Nebraska Comparison with Coincident Economic Indicator - Nebraska